Tower Ltd (TWR)

[forest]

I have been looking at TWR for some time and I can not work out if it is a good buy at its present share price $1.70 or even if it is a good company to have at any price.

I guess what I am saying is that I haven't got a clue how to analys an insurance company.

What I did notice on the ASB site that anybody who would have owned shares in TWR for the last 5 years would have had an avarage return of over 22%, not bad.

Also positive is the low current P/E of about 8 and the brokers consenses future growth rate of 4.9%(I do not take brokers FC to serious but it seems mildly positive all the same).

If anybody can put some light on any important ratios, fact or anything else to evaluate insurance companies that would be greatly appreciated. Also if any of you know of a (preferible simple) book to read which gets into analysing insurance companies that would be good.

Forest

[POSSUM THE CAT]

Forrest do A search there is A big thread on TWR that might help you

[forest]

Thanks Possum, I just read through the tread had forgotten about this one. Looks like I should have got into this one a few months ago. I am still open to any extra tips special to the insurance companies.

Forest.

[Kryptor]

Insurance companies are difficult to analyse, but not as bad as banks.

You have to look at:

- underwriting capability (skill & discipline)
- operational efficiency
- investment nous i.e. how good they are at investing the premiums they hold
- adequate reserves in case the **** really hits the fan
- ability to integrate acquisitions - more and bigger players is the macrotrend in insurance

You can look at effectiveness in underwriting and operations by looking at various ratios - the best one is probably the combined operating ratio which expressed in percentage terms, is the percentage of of written premiums that the entity dishes out - either in claims, broker fees or operational expenses. (under 100% is good, over 100% means they are paying out more than they are receiving).

There are other ratios like the loss ratio (ratio of paid out claims to premiums collected) but the combined operating ratio is simpler because it also includes operational overheads.

In terms of remaing solvent (pretty vital for long term viability - remember HIH in Oz in 2001) the most common measure of whether the company holds sufficent reserves for claims payout is the probability of adequacy ratio. APRA the Australian insurance regulatory body sets the minimum at 75%. Reserves must be held to cater for a range of future possible payouts (discounted to present value using a risk free rate).

The best way explain this measure is to think about risk. When underwriting risk you are catering for a range of outcomes. There is a sort of 'mean' outcome which is quantified by underwriters and known as the 'central estimate'. A risk margin is added to cater for a wider range of outcomes. The central estimate and the risk margin together forms the probability of adequacy and must be more than 75% (if regulated by APRA).

You still need to look at the ordinary stuff i.e. imho ROE is still one of the best measures of company excellence....

I've written this way too late at night but I hope this helps.

[forest]

This is a very helpfull explanation Kryptor, this will give me a direction to look into TWR a bit deeper.

Forest